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Included are four key questions for individuals who are thinking of investing in hedge funds, essential in their decision-making process.

If you are thinking of investing in hedge funds, you’re likely spending a fair amount of time concentrating on understanding the different investment strategies and associated risk/return characteristics. That is essential information in your decision-making process. But equally important, is understanding the operations and underlying economics of a fund—for example, what are the associated fees and expenses charged by the fund, the fund manager, and any third-party service providers, or how often can subscriptions or redemptions be made. These considerations can seriously impact whether an investment is appropriate for your risk profile or makes sense given your current investment objectives or portfolio’s asset mix. There’s a lot to take into consideration.

Ready to invest? Let’s recap four key questions you should be able to answer before you do.


1. What is the role of this fund in my portfolio?

Investors allocate to hedge funds for many different reasons, e.g., return enhancement, risk mitigation, or capital preservation. For instance, when creating a new portfolio allocation dubbed “Risk Mitigating Strategies” in 2016, CIO of the California State Teachers’ Retirement System (CalSTRS) Christopher Ailman stated, “We have a very large bias to growth in GDP in our portfolio. We want to hedge that. We actually want the hedge fund strategies not for extra return, we are doing the opposite. We think that they actually can be a defensive strategy.” It sounds obvious but understanding your objectives will help you better align your hedge fund allocation to your overall investment goals.

2. Am I comfortable with the manager’s investment process and risk/return profile?

It is critical to understand how an individual hedge fund has historically generated returns and what the plans for the future may be. Within each strategy, different managers take on different amounts of risk to achieve their individual return targets, leading to a wide range of prospective risk/return profiles. Investors should understand a manager’s investment process and structure, and the underlying drivers of the fund’s returns. This includes potential drawdowns and how the strategy would be expected to perform under various market scenarios.

3. Am I comfortable with the fund’s liquidity?

Hedge funds are less liquid than ETFs and mutual funds but more liquid that private equity or venture capital investments. Redemption terms vary from fund to fund—some managers offer monthly or quarterly redemptions while others may require investments for a multi-year period. Investors must determine if the redemption terms suit the manager’s strategy— for example, funds that run more concentrated strategies, or invest in more illiquid markets, tend to be less liquid. But they must also determine if these terms suit their liquidity needs—for example, ensuring they have sufficient cash available for other near-term needs.

4. Am I comfortable with the fund’s operations and third-party service providers?

Investment due diligence is only half of the equation. Hedge funds are much more complex than mutual funds or other publicly traded investment types, and they engage with a variety of third-party service providers in the execution of their investment strategy. Operational due diligence is a continual process of evaluating the operational aspects of a hedge fund and verifying what is conveyed in a fund’s legal documents, audited financials, and reference checks before, and while, invested. Investors are looking for any ‘red flags’ or anything that would indicate an unnecessary risk. If a hedge fund does not pass operational due diligence checks, an investor should not invest or, if already invested, seek to resolve the issue or withdrawal from the fund.


(1)Hedge Funds May See Up To $8.7 Billion Windfall From Calstrs, Bloomberg, Klaus Wille, September 14, 2016,


These materials are for informational purposes only and are not intended as, and may not be relied on in any manner as, legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security described herein. Any such offer or solicitation shall be made only pursuant to the final confidential offering documents which will contain information about each fund’s investment objectives and terms and conditions of an investment and may also describe certain risks and tax information related to an investment therein.

Past performance is not indicative of future results. All of the products described, including any products made available to clients of iCapital, are private placements that are sold only to qualified clients of iCapital through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.

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Joseph Burns

Joseph Burns

Joseph is a Managing Director and Head of Hedge Fund Solutions, Co-Head of Research at iCapital, where he is responsible for leading the research team focusing on investment strategies across single and multi-manager product offerings. Before joining iCapital, Joseph was Chief Operating Officer at TCS Capital Management, a global equity hedge fund where he focused on portfolio construction, risk management, and business development. He holds a BA in Political Science from Manhattanville College and an MBA from Fordham University. See Full Bio.